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Help me understand Option Trading
Main Post:
Hey guys so for the last 5 hours I have been trying to understand how option trading works and this is what I got so far:
- Long call - buy it when you think the stock price is about to increase. Profit Potential: Unlimited. Loss potential: Premium paid.
- Short Call - buy it when you think stock price is about to decrease. Profit Potential: Premium received. Loss Potential: Unlimited.
- Long put - buy it when you think stock price is about to decrease. Profit potential: unlimited (till strike point hits 0). Loss potential: premium paid.
- Short put - buy it when you think stock price is about to go up. Profit potential: premium received. Loss potential: unlimited or value of current strike price.
So then wtf is short selling? Also when do I do a call and when do I do a put?
Top Comment: Expect to spend a few months as there is a lot to learn! 5 hours is just a taste. ;-D Long = Buy. Theta decay works against these trades as this lowers the option price (extrinsic value) since long trades profit from the option price increasing, buying to open low and selling to close higher. Buy to Open for $1.00 and Sell to Close for $1.25 = 0.25, 0.25 X 100 = $25 profit per contact. Short = Sell. Theta decay works for short option to help them profit as you sell to open high and work to buy back lower to profit. Sell to Open and collect $1.25 and Buy to Close for $1.00 means keeping 0.25 of the credit for a $25 profit. Short selling refers to stocks borrowed from your broker and sold by you on the open market for the current price. You need to replace these shares and are expecting the stock to drop so you can buy them back later at a lower profit. Sell 100 shares short at $50 per share bring in $5,000 and your account will show -100 shares. If the stock price drops to $45 per share, you can buy +100 shares back for $4,500 and keep the $500 as profit. Starting with -100 shares short, then buying +100 shares to replace them, equals 0 shares and being out of the position. It should not noted that if the stock went up to $55 then it would cost $5,500 to replace the shares for a $500 loss. You would buy to open a long call when your analysis indicates the stock price will move up in a specific timeframe (expiration date). If the stock moves up by enough in the timeframe then the call option can be sold to close for a profit. You would sell a short call when your analysis is that the stock will drop in the timeframe (expiration date). Sell to open the call and it will profit if the stock drops by enough when it can be bought to close. Puts are the opposite. Buy to open a long put when the analysis is the stock will move down. Selling to open a put when the stock is expected to move up. A quick note about a key difference between buying and selling is that buying requires the stock to move up faster than the theta decay erodes the price, and by enough to compensate for the cost paid to open. Selling has an advantage in that we want the option price to erode, so theta decay can help these profit. Stated another way, a long (bought) option requires the stock to move in the correct direction by a good amount to profit, however, a short (sold) option can profit if the stock moves in the correct direction, doesn't move at all (due to theta decay), and many times even if the stock moves in the wrong direction. Because of this most experienced options traders sell options and few buy them. Note that r/options has a lot of links and a new trader thread where any questions can be asked.
Can someone explain calls and puts to me?
Main Post:
I have no idea how calls and puts work, and people say not to do them if you don’t know what you’re doing. Can anyone explain how they work, what you would need to look at it, how breakeven prices are calculated plus profits whether it’s a call or put, and any other additional useful information? Is it just a trial and error thing? Yes, I know this is a stretch, and I know I’ll probably get heckled and trolled for this post, but you never learn if you don’t ask questions. My apologies if this is straightforward, and I understand if no one wants to just give the answer away, but I’m hoping there are one or two individuals with genuine, helpful responses to this post. I’d really appreciate it!
Top Comment: If you're willing to learn then the information is all out there. People can't help but feel that when someone just asks overly generalised questions they're looking for a "dumbed down" version. If you can't or won't even google something, what's the point explaining. Options prices are affected by many things and constantly changing, so it's not that straightforward to just "calculate" in your head what a contract will be worth at any given time. It's much easier to test stuff out with a sim account and get a feel for them to better understand them.
The Ultimate Free Course for Options Trading
Main Post:
Here’s a free resource for options trading I created. 60 + lessons that teach everything you need to know to run a good options portfolio.
Here's the link:
https://predictingalpha.com/the-ultimate-guide-to-selling-options/
Backstory
A couple years ago I wrote a series on reddit about how to sell options profitably that the community loved. I’ve finally put together a completely free archive of everything I know about options and option selling.
I made this because there's a lot of noise out there around options education, so this is the no BS course I wish existed when I was getting into the space. I tried to make it easy to go through but realistically some of it will be challenging because hey, options are complicated.
What the course covers:
- Basics of how options work - All the characteristics and important parts of option contracts.
- Volatility module - Teaches you how volatility works and impacts option prices.
- Learning and interpreting option greeks - Complete breakdowns of each option greek, how they interact with each other and why they matter for your trades.
- Skew and term structure - How to think about different strikes and expirations like a professional.
- Option selling structures - 4 different ways to structure your trades and how to pick between them.
- Trading strategy fundamentals - Basically how to treat your trading like a business and really understand how to extract returns from the market.
- How to actually make money - Serious strategy talk. Now that you know how options works, here’s how you actually make some money.
- Two evidence backed strategies that work - A complete guide for selling options on ETFs and selling options around earnings events. Two well known, documented strategies that generate solid returns.
Hope you all like the course, and hopefully it levels up our community and we can have some awesome discussions.
Top Comment: Cheers! I'll def save this and check it out during the fall as I'm too busy IRL as is, but I've been looking for resources. Been buying stock since Aug 2024 and it's been a new learning curve. I'm up 8% so far but want to learn more about options trading. Wanna be able to give my kids down-payment once they're adults etc. Much appreciated
How to be successful in Options Trading
Main Post:
Hi, I’m learning options material for a month and few times I have tried options paper trading but I want to pursue this full time. What should I do ? I’m serious in my decision and in my question, and if people post negative comments here, you are wasting your time. Some genuine responses please. 🙏
Top Comment: Start with small amounts of real money ($500 or so) and learn by doing. I use Tastytrade as my broker, but Robinhood is fine, too. Some general rules that work for me: I only buy calls on red days (when a stock is down). That stops me from FOMOing in and buying the top of a rally. I only buy options at least 45 days out into the future. 90 days or more is preferable. I only buy options within 10% of the current price of the underlying stock. So if a stock costs $70, I wouldn't buy any calls further out than the $77 strike price, expiring at least 45 days in the future. I never hold options to expiration. I always sell at least 14 days before expiration and I take profit when I am up 80% or more. You will take some gains and some losses. The most important thing is to LEARN LEARN LEARN from each result. Don't even think about doing this "full time", that's not a realistic goal. A realistic goal is to be green and book at least $200 in profit every week. Good luck and have fun. Don't take it too seriously.
Why would you ever want to pick the first option ?
Main Post: Why would you ever want to pick the first option ?
Top Comment: Probably because first option gives you another event when temporary modifier ends, and that event is worth it (in that case it is +2 to monarch skill).
What are good stocks to trade options (just doing research)
Main Post: What are good stocks to trade options (just doing research)
Top Comment: There's no answer for this, though usually higher volume helps so that your buys/sells have higher chances of going through. You can do anything with options. Stocks that are collapsing are good for options. Stocks that are skyrocketing are good for options. Stocks that aren't moving at all are good for options. All three can also be terrible for options. Whether a stock is "good" for trading options depends on your strategies and knowledge level. Anyone can make or lose money trading options for any stock. If you're asking this, then you're still not sure what options even are; focus on learning what they are before worrying about which stocks you should trade. Not understanding options means that you could be handed the "best" stock to trade for the day and you'd still bankrupt yourself.
Can someone explain the main benefit of using options vs stock ?
Main Post:
I am a raw beginner. I do not understand complex terms. Explain like I’m 5 years old please. Thank you.
Top Comment: The main benefit is leverage (which can be a double-edged word)